The government took the right measures at the right time to weather the global economic slump, says State Bank of Vietnam Governor Nguyen Van Giau said, giving kudos to the interest rate subsidy program.

"In late 2007 and early 2008, when the global recession took its toll on many countries, including Vietnam, the government had to switch its focus from controlling inflation to preventing an economic slump and ensuring stability," Giau said in an interview published on the central bank website.

The government decided that a fiscal stimulus was necessary and that "the key measure would be offering interest rate subsidies," the governor said in the interview, in which he reviewed government's economic policies in preparation for the new lunar year.

The Vietnamese government in January 2009 offered VND17 trillion in subsidies to encourage banks to extend credit to businesses. Eligible businesses received a four-percent subsidy on short-term loans.

"I was really worried when the program began because no other country had taken such a measure before," Giau said. "Moreover the program involved the whole banking system.

"And it was a surprise to me that some foreign bankers strongly supported the program, saying it would be the most effective policy for the society, both psychologically and economically."

Unlike many other countries, Vietnam was "brave" and "straightforward" as it forecast possible negative impacts of the global downturn on its economy at an early stage, Giau said.

The country's economic forecasting began to improve in 2008, allowing proper policies to be implemented at the right time, he said. "Only one month after the collapse of some financial institutions in the US, the government frankly predicted that there would be declines in exports, foreign direct investment, overseas remittances and tourist arrivals," Giau said.

Interest rates

Interest rates in Vietnam have been kept at the right levels considering the impacts of the loan subsidy program and the price of gold, Giau said.

The State Bank of Vietnam's key rate is currently 8 percent, having been raised from 7 percent on December 1 last year. Commercial banks have to use this benchmark to set their rates, which are not allowed to exceed 150 percent of the base rate regulated by the central bank. Only rates on consumer loans can go beyond the cap.

"The key rate was maintained at 7 percent in 11 months," he said. "If the rate had been raised one or two months earlier, it could have benefited the banking system and banks could have attracted more deposits, but it would have affected the macroeconomic balance."

"As for currency exchange policies, I already said many times before that it's a difficult problem," Giau said.

While other governments manage their currency markets by adopting either a floating exchange rate or a fixed rate, the market in Vietnam is managed flexibly by the government based on supply and demand, he said.

The best solution to the forex problem is to restructure the economy and narrow the trade deficit, Giau said.

Vietnam's trade deficit stood at US$12 billion last year and the deficit in January this year was already well over $1 billion, official figures showed.

"The prospects are generally bright," the central bank governor said, forecasting the deficit would narrow in 2010. "Cement surplus, for instance, can be exported and fertilizer imports are not necessary thanks to sufficient domestic supplies. If Dung Quat refinery works well, the country will spend less foreign currency on importing oil products."